To think a 5year fix on your mortgage is a con right now?

[Bluffysummers]

Admittedly this isn’t really my opinion more of wonderment?

my fix is coming to an end (joy) and when I last took out my mortgage, you paid more to fix longer and now it’s the opposite it’s the shorter rates that are more expensive.

traditionally you paid a bit more for security, and now it’s less? Is that a ‘sneaky’ (not the right word but let’s go with it) tactic from lenders to lock in customers at a higher rate for longer as they are envisioning the BR and thus their interest rates going down?

what are people thinking 2 v 5 year? I was thinking intially 2 due to the predictions that inflation will be close to the BoE target in mid point 2025 and therefore interest rates will come down (probably not to what they once were, but down none the less) so if you’re locked in for 5 years, you’re stuck. But then 5 years grants you the ability to budget for 5 years

My husband Is pretty dead against a 5 year fix, the difference is about £100 a month; he’s just confident this will all go down and honestly I don’t know what to think, we did 5 year for brexit and now I’m kicking myself, Should have done 2 and then 5 or even 10

*I think you have misunderstood the rationale for the differences in 2y vs 5y fixes. When interest rates were low you paid more for a longer fix because you were paying to keep the "good times" going for as long as possible. When interest rates are high it is obviously the other way around because these are the "good times" for the lender and they want them to last as long as possible.

A few years ago, mortgage lenders knew interest rates would go up at some point but didn't know when. The longer your fix, the more expensive the rate because the lender would start to lose money once interest rates rise above the fix point so obviously a 5 year fix needed to be more expensive*

Apologies, but this is simply not how it works. During the period of ultra low rates, we had what's called a 'positive yield curve' i.e. rates were higher in the longer dates than in the shorter. Mainly because it was accepted there was only one direction they could go - up. Lenders don't lose money once rates start rising because they are already hedged. As I said in my previous post, they secured your rate in the market before they offered it to you. banks don't take a punt on this stuff so once you're fixed, they are ambivalent as to where rates go, they locked on their profit on day 1 of your fix.

We now have a 'negative yield curve' i.e. longer dated rates are lower than shorter term rates, because the view is that they will fall from current levels. Clearly this is just a snap shot of right now - if we see inflation higher next month for example, you could start to see the yield curve flatten, i.e. there is very little difference between short and long term rates.

I've not had to contemplate this for a long time but I viewed it like this.
With a fix you are buying peace of mind. If interest rates going up would cripple you its right to fix but accept that the price is for peace of mind.

"i don’t quite get the swap rates, what does that mean for a 2 year fix v 5 (forgive me if I’m being dense)"

Swaps are like insurance lenders buy to cover their risk on a fixed rate mortgage. The insurance for a 5 year loan is currently cheaper than the insurance for a 2 year loan and that's enough to bring 5 year mortgage rates below 2 year rates for the time being.

It's as simple as that really (though quite complicated beneath the surface, obviously).

As a first time buyer with a 20% deposit I (bought at the top of the market) went for a 5 year fix at over 3.5% and then discovered others had below 2% rates on a shorter term (though with higher arrangement fees) but I knew where I was with the payments and was happy to have the certainty (and I wish I could secure that rate when I have to remortgage!!)

And that’s because the thought is that rates will come down? (Hence why the insurance on the longer term rates is different?)

Swaps are not like insurance at all. They are how banks and big corporates fix their debt. So, when I sell a swap (fix) to a big client who is borrowing say £100m, we enter into a swap whereby we agree with another bank that we'd like to receive a floating interest rate from them (usually SONIA) for 5 years and in return we'll pay to them a fixed rate of say 4.90%.

I then agree with my client that they will pay me a fixed rate of say 5.00% and I will pay them the market floating rate. As a bank, we lock in the difference between 4.90% (the rate we've managed to get) vs the 5.00% the client has agreed to fix at.

From that point on, regardless of where rates go, I'm paying 4.90% to one bank and receiving 5.00% from my client. So it doesn't matter in the slightest where rates go - I pay 4.90% and receive 5.00% for 5 years. (The floating elements net off against each other).

Now, just replace my big £100m client with lots of smaller clients with £250,000 mortgages, it works the same, but we just have a group of customers instead of one.

Banks don't play the markets - they can't from a regulatory perspective and it's also a guaranteed way to lose money. In terms of your mortgage, could you fix say half of it? That way, if rates go up you've got half locked in, but if rates fall you can benefit on half of it.

Yeah I used to work in current accounts and it’s similar to how loans and current accounts and that work so this makes sense to me. Thanks for taking the time explain in this context

I dont think I’ve got the option for splitting it, and if it was surely it would be leaving in on svr? which is so much higher than fixes. I could if i had additional borrowing and had them on two separate rates.

is there any prediction in how the swaps are going to be in the future? Or knowing what you do, what your knowledge saying to you on 2/5 yr?

I don't think it's "sneaky", it's an indication that the markets think rates will fall. If you do end up paying over the odds, that's the premium you've paid for stability, as you say. No one knows what will happen really, I expect it to go a bit higher yet, but what do I know?

I think 2 years is not enough time to guarantee they will go down, 3 might be a better bet but either way I can see how 5 would be appealing as at least you know where you stand for 5 years and if they haven’t come down by then then we’ll all be in a lot more trouble than we are now

I'm locking in an ISA 5 year deal as think interest rates will plummet

Well, I fixed for seven years a few months ago at 3.4%. I think the days of interest rates at 2% and lower are gone, and that inflation won’t be sorted any time soon, as the reasons behind it aren’t going to be easily resolved.

My five year fixed was up in February and I was offered the chance to lock in a new deal last October.

Repayments have gone up by £115 per month, however if I'd not locked that deal in they'd have gone up by nearly £300.

I'm a single parent, just getting back into work after a period as a full time carer for elderly parents during the pandemic and cant afford to take risks atm.

The view currently, re swap rates, is that they will come down across all tenors. Most economists believe the market has over reacted to the BoE decision last week (panicked a bit), and that inflation is obviously sticky. The employment market is still very tight, with pressure on all employers (public and private) to increase wages. Once/if we start seeing unemployment growing and wage pressure comes off that, combined with lower energy prices, should see inflation fall, enabling the BoE to lower rates.

The big question, which of course nobody knows, is when this will happen. It’s really very dependent on the labour market. If that continues to hold strong, it might not be until later in 2025 but it’s real crystal ball gazing. I saw retail sales figures were lower again today, which suggests things might be starting to bite - but like everyone else, obviously I don’t know.

I advocate the view that if you can find a fix you can afford and it gives you peace of mind, 2 or 5 years of paying a bit higher than you might have needed to isn’t a bad decision. It’s a relatively short time out of a 20-25 year mortgage.

@ChittyBangabang my ISA’s are all fixed too 😊

Another factor that you need to take into account on the 2yr v 5yr is the amount of equity in your house. House prices are likely to experience a correction in the short term (I don't envisage a crash per se but I think up to a 10-15% drop in some areas is looking increasingly likely).

Anybody that has bought recently with a 10% deposit could end up with very little equity when they come to renew in 2yrs which will make remortgaging very difficult.

Our fixed is not up until July 2024 so am hoping by some miracle that something happens before then to provide some clarity on best way forward!!

"And that’s because the thought is that rates will come down? (Hence why the insurance on the longer term rates is different?)"

Exactly, that's the basic idea. You get a lot of people on threads like these trying to prove their intelligence by wanging on about SONIA and yield curves which is largely correct, but a bit unnecessary for a Monday evening on Mumsnet.

At the end of the day it's currently cheaper for lenders to manage risk around 5 year loans than around 2 year loans and that's that.

We’ll actually be ok in terms of equity I think, we’re at a 60% ltv bracket right now with about 45% being mortgaged. We’ll need to take some additional borrowing for some improvements but it’s not cost effective to do that now, so will bring down the balance more and then do additional borrowing at a later date

I fixed at 5.5% when the banks crashed and it was a huge regret I won't be doing that again so going for 2 years.

We have just fixed for three years on the advice of our broker. We have always been on a tracker but makes sense at the moment to fix. Hopefully it's long enough for things to stabilise but not so long we feel trapped by it.

I fixed for ten years in April. I'm 44 and have always felt like 4% is cheap for a mortgage, and the past 15 years have been a (long) blip. Even if I'm wrong, 4% is affordable for us and we have certainty over rhe decade. I'm a chartered accountant with a keen interest in personal finance but v interested to read economists' and IFAs' views (even if I'm locked in until 2033 )

Hoping to borrow more at next renewal in March to fund extension. How does that work, do they give you the money on application completion or can you say to them I want the money just before my builder needs it so as not to be paying extra interest.

This is my view too. It's less about the amount you'll pay and more about your own financial position. Are you relatively financially secure and further increases in COL and mortgage rates wouldn't really affect you too much - if so, go tracker or short term fix. You can essentially afford to take the risk. If the current higher rates are getting you to the edge of your current financial comfort then fix for longer for the security of knowing what your mortgage payment will be for the next 5 years. I think in the current market it wouldn't be wise to fix for 10, as within 10 years there's a stronger chance rates will come down.

Think I’d be holding my nose and going for a 2 year and would expect rates to have come down a bit by the end of that. With current borrowing levels I just don’t see it being sustainable for a lot of people beyond that sort of time frame.
On a fix at 1.4% for another 4 years but regret not going for 10. Was really a coin flip between the 5 or a 10 year at 1.6% or whatever it was. Where did I think rates were gonna go 😂Ah well, definitely can’t complain, but we won’t see rates that low again for a lonnnggg time and will still probably be a costly mistake.

We fixed for 5 years at 3.99% a couple of months ago. We are in our 50s and have a low LTV. 3.99% is a historically low rate and we can easily afford it so not going to worry too much.